There is something economists have known since 1958 that we don't talk about much, except in private, like in economics journals that nobody else reads. It's a bit too weird.
There are two sorts of world. In a normal world, the equilibrium rate of interest is above the growth rate of the economy. In a weird world, the equilibrium rate of interest is below the growth rate of the economy. What's weird about a weird world is that it needs a bubble, a Ponzi scheme, a chain-letter swindle, for the economy to work well.
Maybe the world we live in is a weird world. And it needs a bubble to work well. And the economy keeps trying to create a bubble. And when it succeeds the economy does work well. But bubbles are unstable and eventually burst. Then it works badly again. Until the next bubble.
The 1958 paper was Samuelson's "An Exact Consumption-loan Model of Interest with or without the Social Contrivance of Money". Here's a simplified version.
Each cohort of people lives for two periods. The population, and everything else, stays the same. When young they work and produce goods. When old they cannot work and cannot produce goods. So they want to save when young so they can consume when old.
If no goods can be stored, they cannot save, and the old starve. They would like to lend when young, even at very negative interest rates, but there is nobody willing to borrow from them. The next cohort, who could pay them back, haven't been born yet.
A chain letter swindle solves the problem. Each old person sends a letter to one young person, saying "Please give me half your goods, and then you can send this same letter to one young person when you are old". Each young person now saves half the goods he produces, by buying one letter. And he sells the letter when he is old for the same amount of goods. The rate of interest is now zero, as is the growth rate of the economy.
Every cohort is now better off than without the chain letter, because they don't starve when old. But the first cohort to invent the chain letter swindle is much better off, because they consume all their production when young, plus half a young person's production when old. And if any cohort breaks the chain, the preceding cohort is much worse off, because they consume half their production when young, and nothing when old.
Samuelson called the chain letter "money". But it could be an unfunded government pension plan. Or gold could serve the same purpose, even if gold were intrinsically useless except as a store of value. Whatever it is, it's a bubble, that has a market value in excess of any intrinsic value.
The value of the bubble would be equal to half the GDP per period. So, if the "period" is about 20 years (if retired people live for about 20 years), the bubble would need to be worth about 10 years of GDP. That's a very big bubble to make the economy work well. It could be bigger still if people wanted to save for emergencies, or for their kids, as well as for retirement.
Introducing capital alleviates the problem, but may not always solve it. Without capital, the natural rate of interest in the model is minus 100% per period, because the produced goods rot before the next period. Investing in real capital can have a positive rate of return, and so can raise the natural rate of interest above zero. If the marginal return on capital, in equilibrium, is greater than the growth rate, then the world returns to normal. People will save by investing in real capital, and the economy doesn't need a bubble. But if the marginal return on capital, after an allowance for risk, is less than the growth rate of the economy, it still needs a bubble. A chain letter, or bubble, can grow forever at the growth rate of the economy, as long as people believe in it and don't break the chain. And it can pay a rate of interest equal to the growth rate. So people save partly in real capital, and partly in the bubble, and both pay the same risk-adjusted rate of return, equal to the growth rate. (The marginal rate of return on capital rises as the capital stock falls when people hold less capital and more bubble.)
Land may also alleviate the problem, in the same way that capital does. But land is different from capital because they aren't making it any more. That means that land may also serve as the bubble asset, with the price of land made up of a fundamental component equal to the present value of expected rents, plus a bubble component, with the bubble component growing at the growth rate of the economy and yielding capital gains. And house price bubbles are really just bubbles in the price of the land on which the house sits, because the house itself is just reproducible capital.
Governments can create the bubble, with a national debt they never pay the interest on, but just rollover from one year to the next. A Ponzi scheme. If spending and tax revenues grow at the growth rate of the economy, and that growth rate is above the rate of interest, they can do this forever. The long run government budget constraint just doesn't add up, literally.
Bubbles can solve the problem of living in a weird world. But the trouble with bubbles is that they burst. They only stay up because people believe in them. And if people stop believing in them, or think the next generation of fools will stop believing in them, they burst. Or, remembering that it is very profitable to start a chain letter, every bubble is vulnerable to the next bubble that someone invents to take its place in people's savings.
When a bubble is big enough to satisfy people's desire to save, the economy works well. But when it bursts, people often resort to saving in the bubble asset par excellence, money. But money is the medium of exchange. And because the medium of exchange is typically the unit of account as well, and prices are sticky, the real value of the money bubble cannot rise quickly enough to fill the space left by the bursting of the other bubble. So there's an excess demand for the medium of exchange. And that causes a recession. Until the next bubble comes along. And that happens as soon as the growth rate picks up enough to exceed the rate of interest.